Arena, Marco; Revilla, Julio E.
Description:
The empirical literature on budget
cyclicality has generally focused more on assessing the
degree of pro-cyclicality in federal (central government)
revenues and expenditures and less on budget cyclicality at
the sub-national level in multi-tiered systems. This paper
attempts to contribute to the literature on budget
cyclicality by examining how sub-national fiscal revenues
and expenditures are linked to the business cycle in Brazil,
particularly after the introduction of the Fiscal
Responsibility Law. It explains the degree of
pro-cyclicality across Brazilian states, and assesses
whether intergovernmental transfers help to stabilize
states finances. These issues are addressed using both a
time-series and a cross-section dimension at the Brazilian
state level for the period 1991-2006. The empirical evidence
suggests the existence of a pro-cyclical fiscal policy in
Brazil at the state level. However, the introduction of the
Fiscal Responsibility Law helped to reduce Brazilian states
spending-side pro-cyclicality. For the Brazilian states, the
main source of the observed pro-cyclicality is found in the
behavior of tax revenues directly collected by the state
governments. Intergovernmental transfers (federal transfers
to the states) are not associated with changes in gross
state product, but they are pro-cyclically aligned with
national gross domestic product, which could amplify the
pro-cyclical behavior of sub-national expenditures.